Flaherty, provinces bare claws in debate over single securities regulator

Once again, it’s like herding cats. A group of provincial finance ministers met in Montreal on Monday to talk about, among other things, how to keep stringing along the federal government and its stubborn pipe dream to create a national securities regulator. And once again, there was little, if any, consensus on whether to co-operate with Ottawa or dig in their provincial heels even deeper.

Ontario’s newly minted Finance Minister Charles Sousa could not attend but a handful of finance ministers from provinces that are not on the front lines of negotiations were present, joining their Quebec host in redrawing the usual battle lines of opposition. In Ontario’s absence, which represents about half of the country’s capital markets, British Columbia was left to carry the spear in support of a federal framework for a common securities regulator.

After yet another round of discussions, the insecurities and knee-jerk responses from the provinces still rule the debate. True, there are legitimate concerns about relinquishing powers and the loss of all-important revenues, especially in these days of escalating budget deficits. But these issues are hardly new and they’ve been addressed ad nauseum. This battle, now into its third decade, is certainly one of the longest in Canadian political history. The Fathers of Confederation had less trouble negotiating nation building.

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Meanwhile, federal Finance Minister Jim Flaherty fumes. For one, he’s embarrassed to see a gaggle of representatives from Canada’s patchwork of 13 regional market watchdogs show up at international conferences often working at cross purposes. Take for example, provincial securities staff from across Canada convened in Australia for meetings of the International Organization of Securities Commissions, a heady group where typically the main financial regulator from 100 countries is supposed to attend.

Meanwhile, companies and market participants, who complain of the burden of costs resulting from a myriad of multiple compliance jurisdictions, are begging for a more streamlined regulatory regime. And investors want tougher enforcement and punishments.

Mr. Flaherty is losing his patience and served notice in his budget on March 21 that Ottatwa isn’t willing to wait, or play nice for much longer. “Canada is the only industrialized country without a national securities regulator,” the finance minister declared in the budget. “By pooling provincial, territorial and federal jurisdiction and expertise, Canada could have a world-leading securities regulatory regime.”

Could have and would have are the recurring phrases of the lost opportunities in this frustrating tale of creating a common Canadian securities regime. Even after the Supreme Court slapped down the federal government’s attempt to shove a national regulator down the provinces throats in 2011, Mr. Flaherty tried a more collaborative approach to win provincial support for a common securities regulator. Apparently, he had hoped the provinces, who could smirk with victory after the high court prohibited Ottawa from proceeding with its 2010 plan as an unconstitutional intrusion on provincial powers, would be grown up about it.

To that end, his office spent most of last year working with a majority of the provinces and territories to create a federal framework that would have seen the provinces outsource the administration of their securities regulations to Ottawa. The idea was to establish a new organization similar to the way all but three provinces – Ontario, Quebec and Newfoundland and Labrador – contract out their provincial law-enforcement duties to the Royal Canadian Mounted Police. Flaherty even dared to hope a “delegated arrangement” could be worked out “within the next year or so.”

Clearly those talks were going nowhere. So Mr. Flaherty delivered a velvet punch in his budget by announcing that Ottawa will create a new lawyer of federal securities regulation – not to be confused with provincial laws – to form a common regulator with shared federal-provincial powers. Ottawa is attempting to wipe away that provincial smirk with its own interpretation of the Supreme Court’s landmark decision. The top court may have deferred the day-to-day aspects of the industry to the provinces, but it also ruled that Ottawa was responsible for overseeing issues of national importance, notably systemic risk. Going forward, if a “timely” agreement can’t be reached, Flaherty threatened Ottawa will forge ahead on its own, establishing a federal model to “monitor, prevent and respond to systemic risks emerging from capital markets.” With that, Ottawa just bared its own claws.